CB Richard Ellis Econometric Advisors (CBRE-EA) took a sample of three million professionally-managed apartment units and examined effective rents, which will top out at $1,147 in 2010. This is a decline of 0.8% from Q3 2009. Cruising at 7.3% vacancy in 3Q09, 2010 will see a 30 basis point drop—down to 7%. Although a good start, it still remains above the previous high in 2003.
Effective rents will not see any improvement until 2011, when CBRE-EA expects to see more sustainable job growth in most markets, Gleb Nechayev, senior economist, CBRE-EA, tells GlobeSt.com. "We also expect a pretty dramatic decline in multi-housing completions by that time," he explains. The construction will drop below historically low levels, last seen in the early-90s, Nechayev says.
"Construction has already been severely affected by the economy, but there is also some capital markets constraints on financing," he says. "It's very difficult to get a new project started at this point. And it will be a couple of years before there will be some pickup in construction activity for multi-housing."
This, of course, is not to say that there won't be any new construction, Nechayev explains, however the construction seen in the coming year will be roughly half of what the country saw in 2009. Compared to long-term trends, this isn't the bees-knees, however combined with improved employment, 2011's apartment market will see some robust momentum. In fact, there are a few markets, nationwide, which are reporting a positive net absorption, including: Austin, TX; Baltimore; Boston; Chicago; Denver; Los Angeles; Riverside, CA; Seattle; San Diego; and Washington, DC. Nechayev indicates some of this is most likely a result of a record number of properties offering discounts and concessions.
When it comes to the shadow market's effect on vacancy, the rich are getting richer, it seems. Markets which have been predominantly suffering from over-building in the apartment markets, Nechayev explains--places such as Phoenix and Florida, for example--are also suffering from over-build of single-family homes. This results in higher vacancy of single-family houses, which are competing as rentals to the already floundering apartment markets, in these regions.
The broader implications of the recessionary years may lie with demolition or, more likely, redevelopment. Nechayev points out that there are, on average about 200,000 to 300,000 units demolished in the US per year, however a more probable solution is redevelopment of some of these units. Particularly vulnerable to this opportunistic play would be long-suffering areas in the Midwest, such as Detroit.
"The Ford Foundation is [involved in a redevelopment program]," Nechayev tells GlobeSt.com. "They have a a sizable program that focuses on things like that, going into inner cities and...looking at dilapidated housing and doing something to make it more livable."
The results of such redevelopment are more than economic, despite where that investment begins its journey. "Providing affordable housing [is good], but also foreclosure has a negative impact on the houses around," Nechayev points out. "This [redeveloping] helps to negate that effect. I would expect that in some of these areas, there will be some of that construction activity related to either demolition or renovation, of some sort, that is done with the idea of revitalizing these areas."
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